Democrats misleading claims about tax cuts exposed

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As many economists have pointed out for decades, the corporate tax rate affects the business environment: the general level of economic growth, investment, and entrepreneurial activity. But recent studies have also shown how ultimately, at a micro-level, corporate taxes affect the incentives of economic actors. Specifically, they raise the cost of capital, which in turn restrains the growth of productivity. It is ultimately only through investment in productivity-improving technology that real wages grow, and so employees are the ones who end up paying a large portion of the price for high corporate tax rates.

An American Enterprise Institute study looking at 72 countries over 22 years found that workers’ wages are not responsive to income tax rates, but rather to the corporate tax rate. A 1 percent increase in the corporate tax rate leads to a 1 percent decrease in wage rates. A forthcoming paper to be published in the American Economic Review focusing on the German case agrees, finding that workers shoulder fully half of the corporate tax burden, and demonstrating that low-skilled workers, women and young workers are the ones who suffer the most.

In contrast, tax cuts lower the tax liability, which reduces the cost of capital, thereby stimulating investment, increasing the number of local jobs available, and also raising the productivity of workers and so eventually their wages. In other words, cutting corporate taxes constitutes an indirect way of raising workers’ wages. A recent study calculated that in the United States between 1980 and 2010, a 1 percent cut in the state corporate tax rate increased real wages by 1.1 percent in the long run.
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Kelly-Gagnon points out that we are already seeing that effect with increased bonuses and higher minimum wages. This is a much more efficient way to increase real wages than imposing an unrealistic minimum wage while maintaining a high tax rate. That has the opposite effect actually reduces the number of people with jobs.

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